Tokenization is finally happening.
We in the crypto industry have been talking about the promises of tokenization for years, and it’s finally freaking happening.
Tokenization – converting a valuable asset like cash or real estate to a blockchain-based token – is currently all the rage, with global financial institutions rolling out pilot projects.
UBS has launched UBS Tokenize. JP Morgan has launched its own tokenization ecosystem. And Visa is now allowing banks to issue their own tokens.
I repeat: Visa.
The world’s largest payment network has launched a platform to allow banks to issue their own tokens on Ethereum.
In this update, I’ll briefly explain how tokenization works, why this is the future of crypto, and how you can invest intelligently in this trend.
Why Tokenization?
In the beginning was bitcoin. It made grand claims about being an instant global money system. Peer-to-peer payments anywhere in the world! Without banks!
This didn’t really pan out. The price of bitcoin is too volatile, and merchants are too skeptical. Bitcoin’s development team aren’t really “product people.” Satoshi vanished. So instead, bitcoin became a store of value: “digital gold.”
But the big blocker to bitcoin has been governments, which are kind of attached to their own money supply. As bitcoin birthed a new crypto craze, governments got nervous. In the U.S., which has the most powerful money supply, the government has subsequently waged a war of attrition on crypto.
But investors love crypto! Collectively we have now invested over $2 trillion into bitcoin and crypto assets, so naturally banks and businesses are looking for a way to ride this new trend.
Plus, crypto technology is genuinely better. Bitcoin’s promise of instant global payments really is coming true (with other tokens), thanks to enormous improvements in blockchain technology. Blockchain is in the banks’ best interest.
But if you’re a button-down bank, you don’t want to touch bitcoin or crypto with a ten-foot pole: not when the SEC could sue you! (Here’s a list of crypto lawsuits proudly displayed on the SEC website.)
But tokenization of your own assets? That’s a different story.
Tokenization – turning something of value into a blockchain-based token – is a way to reap the benefits of blockchain technology, without worrying about all the legal mess. It’s crypto, without crypto.
And this is why tokenization is the future of crypto: the banks are getting on board.
How Does Tokenization Work?
Imagine you’ve got a million dollars just sitting in a bank. (It’s fun to imagine.)
Now let’s say the bank issues you one million BankTokens which you can redeem back for cash at any time. Your one million dollars are now 1,000,000 BT.
You’ve got to pay off a mortgage, so you transfer 100,000 BT to another bank, which converts your BT into their own token.
You are paying for your kid’s college education, so you send 250,000 BT to the college payment system, which is another bank that converts your BT into dollars in the college’s account.
You want to invest the rest in a real estate property, which has been converted into its own tokens. The property is worth $2 million, which has been issued as 2 million RealEstateTokens. So you send the remaining 650,000 BT and instantly receive 650,000 RET.
It’s amazing how fast a million dollars goes. But it’s even faster with tokens.
And this is why banks are loving them.
The Benefits to Banks
Tokens are more efficient. The bank can manage and transfer money more quickly using blockchain technology.
Tokens are more secure. Despite the headlines, blockchain is highly resistant to fraud and cyberattacks. (Everything is recorded publicly, on-chain.)
Tokens unlock new products. Just like tokenizing real estate in the example above, you can tokenize anything of value: fine art, derivatives, and even cash. These are all new financial products.
Tokens make money. Of course, the bank will charge a transaction fee on every token transaction, so the more tokenized products, the more revenue.
Tokens reduce cost. Although the bank has to invest in the new technology, the long-term benefit is to lower the bank’s operational costs, increasing profits.
But here’s the big one: tokenization is OK with the government. As long as you are tokenizing assets you already own – not creating a new token out of thin air – the U.S. government is unlikely to sue you. It doesn’t threaten the US dollar!
The Benefits to Consumers
I’m not sure consumers will even know what’s happening.
In the example above, I don’t literally mean that you see 1,000,000 BT in your bank account. (That would frighten and confuse older consumers, for one.) Tokens will be happening behind the scenes.
In your account, you’ll still just see $1,000,000. But tokens will make your million dollars easier and faster to spend.
The bank is the real beneficiary of tokenization, allowing them to purchase other tokenized assets — like bonds or commodities — with near-real-time settlement.
Tokens, in other words, are infrastructure. And the best infrastructure is invisible.
Tokenization May Crush CBDCs
For years, we’ve been hearing about Central Bank Digital Currencies (CBDCs), which are basically tokens issued by the government through its central bank. Instead of holding cash in your account, you can hold CBDCs in your digital wallet, and they work just like cash. (1 USD = 1 US CBDC.)
While some countries (notably China) have already issued their own CBDC, it is a hot button issue in the U.S., primarily due to concerns about government surveillance. (Note: the government already watches all financial transactions over $10,000, so that train has already left the station.)
But here’s why the banks aren’t wild about CBDCs: they could reduce the number of bank deposits. Crypto doesn’t sit in banks, and CBDCs might not, either. So banks are not really wild about the idea of giving up money. And banks are a powerful lobby in Washington.
For all these reasons, banks are much more likely to embrace tokenization (which they can design to keep the money in) than CBDCs (where they could lose control and money goes out). In fact, tokens are the banks’ best defense against CBDCs, which may speed up their push to tokenize – and fast.
The proof: a Citigroup report that shows “65% of [surveyed banks] plan to use [tokenized assets] by 2026, versus 15% who plan to use CBDCs. This is a stark contrast to the previous year where CBDCs were the preferred form of digital money at 52%.”
From 52% support to 15% support. Goodbye, CBDCs. Hello, tokens.
How You Can Invest
This one is simple. Because most banks are building their tokens on Ethereum, just buy and hold ETH.
We’ve long preached the virtues of Ethereum as the leading smart contract platform: no other blockchain even comes close.
Sure, some institutions are creating their own blockchains, but why? Blockchains are messy and expensive to build. And you’ve got to bridge between your own blockchain and Ethereum, which is notoriously insecure.
It’s a little like saying you’re going to create your own payments network, instead of just using Visa. Why? Everybody is already on Visa.
Similarly, everybody is already on Ethereum. So most banks will elect to tokenize on Ethereum, because despite its flaws it has the most tools, the most developers, and the most activity. For most banks, this will be a no-brainer.
The real beneficiary of all this tokenization will not be the banks. It will be ETH investors.
Money is Going Digital
In the end, the bitcoin vision is coming true – just not in the way that the bitcoiners imagined.
Money is going digital, using blockchain technology. But it’s happening through traditional financial institutions tokenizing their own assets. Instead of one coin to rule them all (bitcoin), we may end up with a million coins from a million banks.
But for the original bitcoin believers, that’s not such a bad outcome. Because bitcoin is still the OG. As such, it’s likely to remain on top, even as all these other new tokens flood the market. In fact, the more tokens there are, the more bitcoin may benefit.
And there are about to be a lot more tokens. The tokenization is just getting started.
